NOI (Net Operating Income) = Gross operating income from a property minus all operating expenses; it measures a property’s earnings before financing, taxes, depreciation and capital expenditures.
Investors use NOI to compare properties on operating performance regardless of capital structure. Lenders use NOI to underwrite loans (for metrics like DSCR) and size debt. Brokers and appraisers rely on NOI to estimate value via the cap rate. NOI is the standardized baseline that isolates property-level cash flow from financing, accounting and one-time items.
At its core: Total rental and ancillary income (adjusted for vacancy) + other operating income − recurring operating expenses = NOI.
NOI = Gross Potential Rent + Other Operating Income − Vacancy Allowance − Operating Expenses
Start with gross potential rent (what all units would produce at full occupancy). For trailing NOI use collected/actual rents. For pro forma/stabilized NOI include contractual lease escalations and market rent bumps, but show assumptions clearly. Never include rent credits or concessions as positive income—treat concessions as a reduction to effective rent.
Include ancillary revenue that is recurring and tied to operations: parking, laundry, storage, pet fees, vending, late fees, utility reimbursements (if billed through) and amenity charges. Exclude owner distributions or non-operating transfers.
Apply a vacancy & credit loss allowance to convert potential rent to effective rent. Trailing NOI typically uses historical vacancy (TTM actuals). Stabilized NOI uses market assumptions (e.g., 5–7% vacancy for multifamily) or a projected stabilized occupancy after lease-up.
Debt service (principal and interest) is related to capital structure and lender decisions, not property operations—so it’s excluded from NOI to allow apples-to-apples comparisons across buyers with different financing.
Accounting non-cash items such as depreciation and amortization and owner-level income taxes are excluded because NOI measures operational cash performance, not taxable or GAAP net income.
Major improvements or replacements (roof, HVAC, elevators) are CapEx and normally excluded from NOI. Routine maintenance is an operating expense and included. Distinguish between a repair (expense) and a capital upgrade (capitalize and exclude from NOI or amortize via underwriting adjustments).
Exclude one-time gains or losses (insurance proceeds from a sale, property sale profits, PPP loan forgiveness, owner equity transfers). If an insurance payout offsets a repair that’s recorded as an operating reimbursement, underwriters may adjust—treat one-offs carefully and disclose them.
Gather the rent roll, lease abstracts (escalations, expirations), historical income statements, utility bills, tax bills, insurance, and the property management statements.
Convert gross potential rent to effective rent by applying vacancy & credit loss and subtracting concessions. Add verified ancillary income and remove irregular or non-recurring receipts.
Include property taxes, insurance, utilities (owner-paid), repairs & maintenance, landscaping, management fees, marketing, supplies, janitorial, and contract services. Verify owner-paid vs tenant-paid expenses, and remove any debt service, capex, or owner-level fees.
Subtract total verified operating expenses from effective gross income. Check for accounting misclassifications (CapEx vs maintenance) and adjust. The remainder is NOI.
Checklist highlights: rent roll & lease escalations, vacancy allowance, ancillary income items, property taxes, insurance, utilities, repairs, management fees, reserves for replacements (note separately), remove debt service and taxes. Save a copy of your verified expense backup.
12 units × $1,200/mo = $17,280/mo potential = $207,360/yr. Historical vacancy 4% = $8,294 → Effective rent = $199,066. Other income (parking & laundry) = $6,000. Gross operating income = $205,066. Operating expenses (taxes $18,000; insurance $4,000; utilities $6,000; repairs $12,000; management 6% of effective rent $11,944) = $51,944. NOI = $205,066 − $51,944 = $153,122.
Same property assumes full lease-up and 3% annual escalations: stabilized effective rent = $210,000; ancillary income = $7,500; operating expenses projected = $55,000. Stabilized NOI = $217,500 − $55,000 = $162,500 (used for valuation and underwriting of long-term performance).
If a $25,000 insurance payout covered a roof replacement and was booked as insurance proceeds, exclude it from NOI unless the accounting treated repairs as operating expense and the payout offset operating repairs that otherwise would recur. Lenders typically adjust NOI to remove one-time receipts.
Trailing NOI uses actual results from the trailing twelve months. Pros: reflects real performance. Cons: may include temporary anomalies (large repairs, unusual vacancies).
Stabilized NOI projects performance once the property reaches a normalized occupancy and rental structure (often after lease-up). Assumptions include market rents, market vacancy rate, and stabilized expense levels.
Pro-forma NOI is forward-looking and can be aggressive (optimistic rent growth, low vacancy) or conservative (market rents, higher vacancy). Always document assumptions and show sensitivity analysis.
Adjusted or normalized NOI removes owner-specific anomalies, non-recurring items, or excessive owner benefits (below-market leases, related-party management fees). Lenders often apply standard adjustments to underwrite conservatively.
Value = NOI / cap rate. Example: NOI $153,122 and market cap rate 6% → Value ≈ $2,552,033 (153,122 ÷ 0.06). Use local cap-rate comps by asset class to derive value ranges.
Cap rates depend on interest rates, market risk, location, tenant mix, lease term, and property condition. Multifamily often has lower cap rates than retail or industrial in the same market; always benchmark by submarket and asset class.
Compare absolute NOI and NOI margin across comparable properties. Convert target purchase price into implied cap rate (NOI ÷ Price) to judge competitiveness. Consider required return and post-acquisition upside when setting offers.
DSCR = NOI / Debt Service. Lenders require a minimum DSCR (e.g., 1.2–1.35x) to ensure NOI covers annual debt payments. Underwriters use underwritten NOI (often lower than historical NOI) in this calculation.
Debt yield = NOI / Loan Amount. It’s a lender-centric metric showing return on the loan independent of interest rates. Higher debt yields imply more conservative lending.
Lenders may increase vacancy, disallow certain income items, reclassify CapEx as recurring expense, or add reserves for replacements—each reduces underwritten NOI and impacts loan sizing.
NOI measures property operating profitability pre-financing. Cash flow (owner cash flow) = NOI − debt service − capital reserves − owner-level taxes; it’s the actual cash available to equity holders.
NOI excludes depreciation, amortization and income taxes. GAAP net income includes those accounting items. Taxable income follows tax rules (which may differ from GAAP); neither equals NOI.
NOI is property-level; EBITDA is company-level operating earnings before interest, taxes, depreciation and amortization. FFO is used for REIT performance. Use NOI for individual property valuation and operations, EBITDA/FFO for corporate analyses.
Raise rents on renewal, add or monetize amenities (parking, storage), implement utility billing programs, reduce concessions, and optimize lease terms to increase effective rent.
Negotiate service contracts, improve vendor sourcing, reduce turnover and vacancy costs, implement energy-saving upgrades, and consider self-management if scale permits.
Invest in value-add CapEx (kitchen/bath upgrades, unit renovations, energy retrofits) when projected rent bumps and lower operating costs generate a payback that increases NOI and asset value—model ROI before committing.
Watch for pro forma income that ignores concessions, uncollectible rents, or aggressive leased rates not supported by market comps.
Some sellers push CapEx into operating expenses to reduce reported NOI or vice versa. Verify invoices, project scope, and accounting treatment.
Remove one-time receipts (sale proceeds, insurance windfalls) and normalize expenses when calculating sustainable NOI.
Use consistent vacancy and credit loss assumptions when comparing properties. Mixing stabilized assumptions with trailing results can mislead valuation and underwriting.
Use an NOI calculator to input rent roll, vacancy %, ancillary income and operating expenses to produce trailing and pro forma NOI. When testing offers, run sensitivity cases for vacancy, expense inflation and rent growth.
Keep a checklist that lists required documents: rent roll, lease abstracts, actual utility bills, tax bills, insurance invoices, repair logs, management contracts, and historical P&L statements.
Create or use a template that converts unit rents and occupancy to effective gross income, adds ancillary items, applies vacancy, and subtracts categorized operating expenses to calculate NOI and produce sensitivity tables.
Included: property taxes (yes), insurance (yes), utilities paid by owner (yes), management fees (yes), routine repairs (yes), parking & laundry income (yes). Excluded: mortgage payments (no), income taxes (no), depreciation (no), CapEx (usually no), sale proceeds (no).
Update NOI at least quarterly for active assets; use monthly monitoring for high-turnover or value-add projects. Update pro forma NOI when material changes (rent plan, major CapEx, or market shifts) occur.
NOI margin (NOI ÷ gross income) varies: multifamily often posts higher margins (30–60%) than retail or hospitality (where margins are tighter and operations more variable). Benchmarks are market- and asset-specific—compare with local comps.
Purchase target: 12-unit building. Unit average rent $1,200/mo. Projected ancillary income $600/mo. Expected historical vacancy 5%.
Potential rent = 12×1,200×12 = $172,800. Ancillary income = $7,200. Gross potential = $180,000. Vacancy 5% = $9,000 → Effective gross income = $171,000. Operating expenses (taxes $18,000; insurance $3,600; utilities $6,000; repairs $10,000; management 6% = $10,260; other $2,140) = $50,000. NOI = $171,000 − $50,000 = $121,000.
Using a 6% cap rate: value = $121,000 ÷ 0.06 = $2,016,667. If the buyer wants 65% LTV and lender requires 1.3x DSCR, compute maximum debt allowed: Debt Service = NOI ÷ 1.3 = $93,077 annual → with prevailing interest rate calculate loan sizing. If debt service implied loan exceeds 65% LTV, equity requirements change.
NOI drives valuation and financing. Small changes in vacancy, expenses, or cap rate significantly affect price and loanability. Always validate income sources and expense classifications.
NOI measures property operating performance before financing and non-cash accounting items. Calculate NOI from effective gross income minus verified operating expenses, exclude debt and CapEx, and use NOI to value properties (via cap rate) and to underwrite loans (via DSCR and debt yield).
Next steps: run your property through an NOI calculator, create a rent-roll-to-NOI workbook, or use a checklist to verify income and expense items before making valuation or financing decisions. For complex deals, consult a broker, appraiser or lender to validate assumptions and underwriting adjustments.
